Principles of Macroeconomics (Ch. 8, 9 & 10)

the market value of all final goods and services produced in a country during a period of time.

In the circular flow of expenditure and income, why must the total value of production in an economy equal the total value of income?

Every penny spent on a good or service must end up as someone’s income.

Which equation best represents the relationship between GDP and the four major expenditure components?

Y=C+I+G+NX

What are the four major components of expenditures in GDP?

Consumption, Investment, Government Purchases, and Net Exports.

Final good, intermediate good, or neither? Coffee beans purchased by a coffee shop

Intermediate good

One share of Google stock

Neither

A new pick-up truck purchased by a consumer

Final good

A new home purchased by a family

Final good

Which of the following is included in the economists’s definition of investment?

The purchase of new machines, factories, or houses.

In calculating GDP, which levels of government spending are included in government purchases?

Spending by federal, state, and local governments.

You purchase a new Ford Escape Hybrid from a Ford dealer.

Consumption Expenditure

You purchase a 2011 (preowned) Ford Escape Hybrid from a friend.

Not included in GDP calculation

Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana.

Not included in GDP calculation

Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer in Shanghai, China.

Net Export Expenditure

Ford purchases new machine tools to use in its Missouri Escape factory.

Investment Expenditure

The state of Missouri builds a new highway to help improve access to the Ford Escape plant.

Government Expenditure

Suppose a house is built and sold in the year 2006. If the house is resold in the year 2015, is the value of the house included in GDP for 2015?

No. GDP for 2015 includes only production that occurs during 2015.

Would the services of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2015?

Yes. GDP for 2015 includes the market value of final goods and services. This includes real estate services.

According to Dan Sichel, the amount of time a singer spends working on a record album in a recording studio is “quite analogous to a factory investing in a new machine”. Which of the following statements is correct?

Song development time produces songs, similar to investment in a factory that produces physical goods.

An underground economy involves all of the following except

buying and selling of goods and services by obtaining a permit from the government.

Some countries have larger underground economies than do other countries, because

of government policies that are retarding economic growth.

GDP is an imperfect measure of economic well-being because it fails to measure what types of production?

Household production and the underground economy.

Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?

The value of leisure is not included in GDP, GDP is not adjusted for pollution and it does not account for unequal income distribution, and GDP is not adjusted for crime or other social problems.

When the number of people working outside the home increased, the measured level of GDP

Increases

When there is a sharp decrease in the crime rate, the measured level of GDP

May increase or decrease

If higher tax rates cause more people to hide the income they earn, the measured GDP

Decreases

What can we predict about total production-whether or not that production is included in the calculation of GDP-in the economy when workers become unemployed?

If the workers had been paying other people to perform the household activities prior to unemployment, then total production will fall.

Nominal GDP is

the sum of prices x quantity for that year.

Real GDP is

the sum of quantity (in current year) x prices (in base year).

The annual growth rate of real GDP is calculated by

Real GDP in current year – Real GDP in previous year / Real GDP in previous year x 100.

In an economy with rising prices, compared to the base year,

nominal GDP is larger than real GDP in years after the base year.

The employment-population ratio measures the

percentage of the working age population that is employed.

When an unemployed person drops out of the labor force, the unemployment rate

understates the true degree of joblessness in the economy.

When an unemployed person drops out of the labor force, it

does not affect the employment-population ratio.

Unemployment rate is

number of unemployed/number of people in labor force x 100

Employment rate is

number of employed/number of people in labor force x 100

The labor force participation rate is

number of people in labor force/number of working-age population x 100

Find out the number of unemployed. (Employed=148,739; Unemployment rate=5.3%)

Unemployed/(Employed+Unemployed) = X(148,739+X)=.053

Working-age population is calculated by

Labor force/Labor force participation rate

Which of the following best describes a current trend in the labor force participation rate?

It is decreasing for men and increasing for women.

The extent of job creation and job destruction is

what we would expect in a vibrant market system.

The three types of unemployment are

frictional, structural, and cyclical unemployment.

The type of unemployment most likely to result in hardship for the people who are unemployed is

structural because this type of unemployment requires retraining to acquire new job skills.

The natural rate of unemployment is

the sum of structural unemployment and frictional unemployment.

When the economy is at full employment, unemployment is equal to

the natural rate of unemployment.

“In-between jobs” is what type of unemployment?

Frictional

Increases in the minimum wage will

increase unemployment among teenagers.

The unemployment rate in the United States is usually _____ than the unemployment rates in most other high-income countries partly because the United States has _____ requirements for the unemployed to receive government payments.

lower; more stringent

The price index which is used to measure changed in the cost of living is the

Consumer Price Index (CPI).

CPI is calculated by

sum of current year quantity x price / sum of base year quantity x price multiplied by 100

Inflation rate is calculated by

CPI current year – CPI last year / CPI last year x 100

The average of the prices of the goods and services purchased by a typical family is the

Consumer Price Index (CPI).

Which of the following can give an early warning of future increases in the price level?

Producer price index

How is the GDP deflator calculated?

Nominal GDP/Real GDP x 100

In the years after the base year, nominal GDP is ______ than real GDP.

greater

In the base year, nominal GDP is ______ to real GDP.

equal to

In the years prior to the base year, nominal GDP is ______ than real GDP.

less

The difference between a nominal variable and a real variable is that

nominal variables are calculated in current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.

Menu costs are

the costs to firms of changing proves.

The internet has ______ the size of menu costs.

reduced

The real interest rate

is equal to the nominal interest rate minus the inflation rate.

When the real interest rate is lower then

the situation will be better for the buyer.

The rule of 70

is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.

What two key factors determine labor productivity?

The quantity of capital per hour worked and the level of technology.

Potential real GDP is

the level of GDP attained when all firms are producing at capacity. (grows over time)

Human capital is

the knowledge and skills workers acquire from education, training, or their life experiences. (ex. a worker gets a college degree)

The best measure of the standard of living of the typical person in a country is

real GDP per person.

The financial system of a country is important for long-run economic growth because

firms need the financial system to acquire funds from households.

_______ is not a “loanable fund”

real estate

Households supply loanable funds because of the

interest income received from the borrowers.

Businesses demand loanable funds because

firms need to borrow funds for new projects, such as building new factories or carrying out new research projects.

Crowding out occurs when

governments must borrow funds which causes interest rates to rise and thus private investment is reduced.

The ease with which a financial security can be exchanged for money is referred to as

liquidity.

Even though individuals earn interest on financial investments such as bonds, mutual funds, and certificates of deposits, they may still hold wealth in checking accounts because

individuals need money that is available to be spent on goods and services.

Ford F-150 trucks, McDonald’s Big Macs, Kenmore refrigerators, Huggies diapers, and Caterpillar industrial tractors. Production of this good is likely to fluctuate _________ fluctuations of real GDP during the business cycle

more than; less than; more than; less than; more than

What is the general relationship between the business cycle and unemployment and inflation?

During an expansion, unemployment falls and inflation increases.

During the expansion/recession phase of the business cycle, production, employment, and income

increases; decreases.

When tax revenue exceeds, equals, is less than government spending there is

a budget surplus; a balanced budget; a budget deficit.

As the economy nears the end of an expansion,

wages are usually rising faster than prices, interest rates are usually rising, and the profits of firms will be falling.

Purchases of which types of goods are business cycles most likely to affect?

Durable goods.

Recessions cause the inflation rate to _________, and the employment rate to ________.

decrease; increase

The business cycle refers to

alternating periods of economic expansion and economic recession.

Long-run economic growth is

the process by which rising productivity increases the standard of living of the typical person.

Long-run growth is measured by

increases in real GDP per capita, which depend on increases in labor productivity.

Labor productivity is

the quantity of goods and services that can be produced by one worker or by one hour of work.

Capital refers to

manufactured goods that are used to produce other goods and services.

Economists often discuss economic growth in terms of growth in potential GDP, which is

the level of GDP attained when all firms are producing at capacity.

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